Transfer Pricing Adjustments Research Articles

OS ECJ-TF 1/2019 on the ECJ Decision of 31 May 2018 in Hornbach-Baumarkt (Case C-382/16) Concerning the Application of Transfer Pricing Rules to Transactions between Resident and Non-Resident Associated Enterprises

This article is focused on the Court's decision in Hornbach-Baumarkt (Case C-382/16) (Hornbach) which is an important clarification the conditional compatibility arm's length-based domestic transfer pricing legislation with the freedom establishment. Hornbach follows and confirms the previous doctrine formulated in SGI (Case C-311/08). The decision did not follow Advocate General's approach, which would have denied comparability domestic and cross-border situations in transfer pricing cases and, hence, prevent scrutiny domestic transfer pricing legislation under the fundamental freedoms. The authors welcome the requirement that Member States have to grant taxpayers the opportunity to provide evidence of any justification for non-arm's length transactions, with the result that a denial that opportunity through automatic transfer pricing adjustments would render these incompatible with EU Law. In that context, it is further welcomed that commercial justifications may include economic reasons resulting from its position as a shareholder the non-resident company. The Hornbach decision, at least in cases non-arm's length transactions, such as interest-free loans or gratuitous guarantees aimed at replacing equity, clearly suggests that such a shareholder interest in the financial success the foreign subsidiary may serve as such justification.

Solving Double Taxation outside the Realm of a Mutual Agreement Procedure

As transfer pricing adjustments are expected to increase, so will be mutual agreement procedure requests in order to remedy the resulting double taxation. To forego the downsides of this procedure, this article suggests that a MAP should be preceded by an attempt to obtain an unilateral corresponding adjustment. In the Netherlands, such an instrument is available and is called a pre-emptive MAP request.

Disputing Denied Downward Transfer-Pricing Adjustments

This article considers the appropriate forum for disputing a denied downward transfer-pricing adjustment under subsection 247(10) of the Income Tax Act ("the ITA"). It begins by describing various scenarios in which a request for a downward transfer-pricing adjustment may arise, examines the delegation to officials at the Canada Revenue Agency (CRA) of the authority to grant the adjustment, and outlines the CRA's administrative practice on when to grant such adjustments. It then explores whether the Federal Court or the Tax Court of Canada is the appropriate forum to adjudicate a denied downward transfer-pricing adjustment. For disputes under the ITA, the division of jurisdiction between the two courts is generally well defined. The Tax Court has the exclusive jurisdiction to determine the correctness of an assessment whereas the Federal Court has the exclusive jurisdiction to review discretionary decisions of the minister of national revenue or officials at the CRA to whom the minister's powers have been delegated. This jurisdictional divide is less clear for disputes in respect of a denied downward transfer-pricing adjustment. Subsection 247(10) is the only provision in the ITA under which the correct determination of a taxpayer's income is subject to ministerial discretion. The exercise of ministerial discretion suggests that the appropriate forum to dispute a denied transfer-pricing adjustment is the Federal Court. However, subsection 247(11) specifies that the mechanisms for resolving all transfer-pricing disputes under part XVI.1 of the ITA are through the objection and appeal process in part I of the ITA. The language of subsection 247(11), coupled with its legislative history, the restrictions on the Federal Court's jurisdiction, and practical considerations regarding transfer-pricing disputes, all suggest that the Tax Court is the appropriate forum to consider a denied downward transfer-pricing adjustment. Historical case law from the Exchequer Court supports this conclusion. However, there are scenarios in which a denied downward transfer-pricing adjustment may not result in a notice of assessment being issued, and therefore no clear right of appeal to the Tax Court may exist. To ensure that the Tax Court has the jurisdiction to review all denied downward transfer-pricing adjustments, and not only those that result in an assessment, the authors recommend that part XVI.1 of the ITA be amended to include language requiring the minister to issue an assessment in all cases in which a downward transfer-pricing adjustment is denied.

Corresponding Adjustment and Its Interaction with the Mutual Agreement Procedure under Article 25 of the OECD Model

Primary transfer pricing adjustments under article 9(1) of the OECD Model in the case of associated enterprises trigger economic double taxation as the same income has already been subject to taxation in the hands of the associated enterprises in other contracting states. The author examines the existing relief mechanism of economic double taxation under article 9(2) of the OECD Model and its interaction with article 25 thereof to find out its effectiveness and suggests possible measures to remedy the shortcomings.

Intra Group Services: Need for a Uniform Transfer Pricing Regime

Intragroup services form one of the trickiest areas in transfer pricing regulation owing to the internal and routine nature of these activities. Instances of false invoicing and tax evasion are rampant as national tax authorities scramble to detect malpractices. Apart from the transfer pricing challenges inherent in intragroup services, external problems arise in the form of inconsistencies in domestic taxation regimes. The lack of adequate coordination among national tax regulators further aggravates the problem. This research paper seeks to delve into this issue and stress the compelling need for a uniform global approach. The introduction is followed by a brief analysis of the existing legal framework under the Organization for Economic Cooperation and Development (OECD). The subsequent section will discuss major Indian case laws to understand the judicial approach towards transfer pricing adjustments made to intragroup service transactions. The conclusion will highlight the shortcomings and inconsistencies in the existing regulatory framework and emphasize the need for a uniform transnational approach.

Resolving double taxation in a global environment – when might it impact on deal value? Consideration of the availability of mutual agreement procedures and arbitration

Multinationals are under increasing scrutiny by revenue authorities across the globe. The heightened risk of tax audits, transfer pricing adjustments and the potential for double taxation mean that it is more important than ever for multinationals to consider what strategies are available to resolve international tax disputes. Inherent tax risk and uncertainty creates unique challenges for oil and gas multinationals as it can impact on deal value where double taxation arises. This is because countries are increasingly behaving like companies – competing to preserve and defend their tax base. With the Organisation for Economic Co-operation and Development’s (OECD’s) Multilateral Instrument pending ratification by the Australian Parliament, this paper considers the availability and practical use of the mutual agreement procedure (MAP) for the resolution of double taxation. Additionally, the paper provides an overview of which jurisdictions have opted to adopt arbitration as a mechanism to resolve double taxation disputes where the MAP has failed.

Transfer Pricing Adjustments and VAT

In this article, the author describes the interrelationship that exists between the adjustments made as a result of transfer pricing policies and VAT. He lists the different types of transfer pricing adjustments and discusses the implications they have on VAT.

Full Federal Court Upholds Transfer Pricing Adjustments on Interest Charged on Intra-Group Loans

This case note explains the recent Full Federal Court of Australia judgment in Chevron Australia Holdings Pty Ltd v. Commissioner of Taxation, in which the Court upheld on appeal the Commissioner’s transfer pricing adjustments in respect of the interest rate charged on intra-group loans.

VAT Effects of Year-End Transfer Pricing Adjustments

A recurrent topic of debate concerns the effects of transfer pricing adjustments for direct tax purposes on the taxable amount for VAT. This topic is currently gaining attention, which is underlined by the recently published VAT Committee working paper on the possible VAT effects of transfer pricing adjustments. Focussing on so-called ‘year-end transfer pricing adjustments’, the authors discuss various fundamental questions concerning the VAT implications of such adjustments. Do year-end adjustments lead to retroactive adjustments to the taxable amounts for VAT of supplies made throughout the year? If any retroactive adjustments need to be made to the taxable amounts for VAT, what are the implications for the VAT returns, EC-Sales lists and interests? What if a year-end adjustment does not lead to an adjustment of the taxable amount for VAT? Can intercompany payments (which follow from year-end adjustments) then be regarded as the remuneration for any service rendered? Or are year-end adjustments merely to be regarded as financial transactions outside the scope of EU VAT after all? These, and other questions are discussed in this article.

Transfer Pricing Audits: Suitability of Transfer Pricing Documentation

Article 26 of Legislative Decree No. 78/2010 introduced in Italy a rewarding regime related to the non-application of penalties involving intercompany transfer pricing adjustments in connection with taxpayer’s submission to the Tax Authorities of ‘suitable’ documentation to support taxpayer’s transfer pricing policies. Assessment on the ‘suitability’ of such documentation by Tax Inspectors has given rise to a variety of critical issues in the last few years.

New Transfer Pricing Information Returns and Rules for Effecting Transfer Pricing Adjustments

Mexico’s implementation of requirements related to BEPS Action 13 appear to go beyond the OECD recommendations, giving rise to an environment of uncertainty for taxpayers and tax practitioners.

Making Transfer Pricing Adjustments Effective: Are the Tax Authorities Obliged to Reopen Fiscal Years for Which Corrective Tax Assessments Have Been Issued, after a Full Tax Audit?

After a recent amendment to the Greek Tax Procedure Code (Law 4174/2013), the tax authorities now have the right and duty to reopen years for which the tax obligation has been finalized after a full tax audit has been conducted and a corrective tax assessment has been issued, only in cases where it obtains new information and only provided that the correction leads to the assessment of additional tax for the fiscal years in question. The author examines the effect of this provision on cross-border transfer pricing audits.

Do State Aid Rules Still Allow European Union Member States to Claim Fiscal Sovereignty?

This contribution provides an overview of the European Union (EU)’s fiscal aid regime. State aid rules impacted national tax policy from the 1960s onwards, although awareness really grew at the end of the 1990s and then again in recent years (2014– 2016). The author places the European Commission’s May 2016 guidance notice on what state aid is meant to be in the context of taxation. He also touches upon the Commission’s June 2016 Staff Working Paper on tax rulings and provides a brief overview of state aid procedure. Next he reflects on how foreign tax rules might (not) affect the net amount of tax benefits that is to be retroactively recovered in case of a finding of unlawfully granted state aid. Special attention will be given to Member State fiscal sovereignty in relation to the adoption and use of anti-tax avoidance measures, such as transfer pricing adjustments.

Some Reflections on the ‘Saving Clause’

Action 6 of the Organization for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting project deals with tax treaty abuse and proposes inter alia, the inclusion of a seemingly innocuous ‘saving clause’ as new Article 1(3) OECD Model Tax Convention (OECD MC). This clause is aimed at preserving the taxing rights of the residence State. While it changes little with regard to the basic set-up of the OECD MC in one-taxpayer situations, it opens the doors for both Contracting States to tax their residents specifically in two-taxpayer situations which may arise, for example, in cases involving hybrid entities, Controlled Foreign Companies regimes, and transfer pricing adjustments. This article reviews the background of this new OECD MC provision, its longstanding use in US treaty policy, as well as some aspects of its breadth, impact and – intended and arguably unintended – consequences.

Changes in Advance Pricing Agreements

The Polish legislature has recently been active in the field of transfer pricing. First, changes were introduced in basic provisions regarding transfer pricing adjustments and thin capitalization (effective from 2015), followed by amendments to APA rules (entering into force in 2016). Finally, transfer pricing documentary requirements were created nearly anew (to be fully effective in 2017). Here, the author considers the amended APA rules.

Alternatives for the treatment of transfer pricing adjustments in South Africa

Alternatiewe vir die hantering van oordragprysaansuiwerings in Suid-AfrikaDie Inkomstebelastingwet maak tans voorsiening vir ’n geagte dividend as sekondere aanpassing wanneer ’n maatskappy ’n oordragsprysaansuiwering ingevolge artikel 31 maak. Gegewe die feit dat hierdie bepaling drie keer in die afgelope vier jaar gewysig is, ondersoek hierdie artikel die bepaling om vas te stel of dit konseptueel suiwer is of bloot ’n praktiese maatreel wat in die toekoms verdere wysigings sal noodsaak. Die konseptuele ontleding is gebaseer op die karaktereienskappe van die alternatiewe transaksies waarop sekondere aanpassings gebaseer word, die vereistes van verbondenheid van persone asook nie-belasting motiewe wat oordragsprysing beinvloed. Uit die ontleding blyk dit dat die hantering van sekondere aanpassings normaalweg wel konseptueel suiwer is, behalwe in die geval waar ’n Suid-Afrikaanse beherende maatskappy ’n oordragsprysaanpassing maak wat voortspruit uit ’n transaksie met ’n beheerde maatskappy. Daar word aangevoer dat die moontlikheid van ’n dubbele dividendbelastingimplikasie ’n uitsondering op die sekondere aanpassing reel vir maatskappye kan regverdig.

Transfer Pricing of Accounts Receivables in the Case of an Extended Credit Period: An Indian Perspective

In this article, the author considers the transfer pricing aspects of imputation of notional interest on late payments from an Indian viewpoint and the conflicting case law regarding this issue. Finally the author suggests strategies for taxpayers to shield themselves from transfer pricing adjustments in respect of their accounts receivable.

Transfer Pricing Adjustments and VAT

In this article, the author describes the interrelationship between transfer pricing and VAT. He mentions that it is a fact that cannot be overlooked. Taxable persons need certainty on how to tackle transfer pricing adjustments for VAT purposes. The author explains that harmonization at EU level is urgently needed.

Fiscal State Aids, Tax Base Erosion and Profit Shifting

In this article, the author describes the application of State aid rules in reviewing EU Member States' tax measures for multinationals providing possibilities for tax arbitrage (Base erosion and profit shifting - BEPS). The author provides examples of measures favouring tax arbitrage which are identifiable as State aid if analysed from that perspective and explains how the application of State aid rules is theoretically justifiable and even more appropriate from an EU perspective rather than the use national anti-abuse rules. The author suggests that State aid review is a more effective instrument to tackle abusive tax planning in the EU, because a supranational regulator, subject to EU judicature control, manages it. The author considers that the power of the tax administrations to correct the taxpayers' determinations of their taxable income and fix them on the basis of independent criteria is intrinsically discretional and that transfer-pricing corrections may be cast into legal uncertainty. Accordingly, a new procedural framework is required to restore legal certainty to an area of State aid control which puts into question the proper implementation of the transfer-pricing power of correction by the competent tax administrations. With the grant of an advance ruling a tax administration provides advance certainty about the acceptable determination of the taxable income that a taxpayer should follow; which the author considers to be a sui-generis special right within the meaning of Article 106(1) TFEU. The article accordingly suggests that the Commission adopts a directive under Article 106(3) TFEU to define the conditions under which individual rulings can be granted in respect of undertakings enjoying special rights such as the multinationals being the recipients of transfer-pricing adjustments.

An introduction to transfer pricing

Purpose – The purpose of this paper is to introduce transfer pricing to a broader community of business leaders who might not be familiar with the importance of this concept. Transfer pricing is a term used to describe inter-company pricing arrangements relating to transactions between related business entities. These can include transfers of intellectual property, tangible goods, services, and loans or other financing transactions. Why is Transfer Pricing Important? The potential for US federal business tax reform and the rigorous pursuit of transfer pricing adjustments by foreign countries are among the top global tax concerns facing senior US tax professionals. Design/methodology/approach – General viewpoint based upon years of consulting work on the topic. Findings – The relevance and importance of transfer pricing is emphasized to a larger business community. Practical implications – This is an excellent introduction to the topic of transfer pricing. Originality/value – The paper is valuable in that it can be read and appreciated by a wide range of audiences.